The Fiscal Cliff? So What Else Is New?

Our economy remains weak; unemployment is high and growth is faltering (but we’re better off than Europe!)

Our government has been borrowing too much money; our level of national debt is unsustainable.

Nevertheless, government needs some revenue, and not just to pay off the debt and close up shop: government has useful, meaningful jobs to do.

So what’s the plan? Well, the White House and Congress are jockeying for position on what everyone agrees Must Be Done before year’s end. The Congressional Budget Office estimates that the effect of doing nothing — of going over the cliff, in other words — would be a four per cent GDP drop in the coming year, leading to a recession. The “Bush tax cuts” would automatically end, and both defense and non-defense discretionary spending would be hit with cuts totaling $110 billion annually.

So: we need stimulus, and we need revenue. But additional federal borrowing would be dangerously irresponsible, and additional federal stimulus, via tax cuts, would increase the deficit.

One way to get some revenue, according to Treasury Secretary Geithner, would be to end the “emergency” payroll tax cut. “This has to be a temporary tax cut,” he told the Senate Budget Committee this year, “I don’t see any reason to consider supporting its extension.”

This year, the payroll tax cut has reduced workers’ tax on wages up to $110,100 to 4.2 percent from 6.2 percent. In 2012 that translated into a $700 tax cut for a person making $35,000 a year. Independent analysts, according to the New York Times, predict that ending the payroll tax holiday would shave a percentage point off of economic output in the coming year, and cost as many as a million jobs.

The payroll tax cut, however, is small potatoes in the ongoing debate over how to avoid the “Fiscal Cliff.” The biggest bone of contention is the question of whether to continue the Bush tax cuts for households earning more that $250,000 per year. And yet, according to the Congressional Budget Office, continuing the tax cuts for those high-wage families would gain our economy a mere 200,000 jobs in 2013!

There is widespread agreement among Economists that progressive taxes offer far less overall burden to economic activity than regressive or neutral taxes do. The reason is simple: When lower-income people have extra money, they spend it. People with higher incomes are more likely to save their extra income. Or, they might invest their extra money. The problem with that, though, is that there’s no certainty that they’ll invest in the virtuous work of productive firms. Not only does our tax code not distinguish between investments that are productive and those what are merely redistributive, it actively favors “capital gains” and real estate, endeavors that widen the gap between rich and poor while creating precious few jobs.

One might say that these economic truths are well-known, but — they were lost, in any case, on California’s voters this year. California is facing serious fiscal problems and needs revenue. Proposition 30, which voters approved, increases income taxes on taxpayers making over $250K, and increases sales taxes by almost four percent. Advocates of the measure touted its progressiveness — and indeed, some 78% of the tax increase would be borne by California’s top 1% of earners. But if progressivity was the selling point, when why the sales tax hike? Its supporters conceded that while the overall effect of Prop 30 is strongly progressive, would nevertheless compel the bottom two-fifths of Californians to pay more of their incomes in state taxes — which could only come from the sales tax part of the deal..

Meanwhile, California’s notorious Proposition 13, the referendum that deeply wounded California’s economy and created the fiscal mess in which it finds itself, is still on the books. And a 2010 initiative that truly would have revitalized California’s economy failed to get on the ballot. The “Prosper California” plan would have eliminated the sales tax, done away with wage taxes on incomes under $150K and instituted a state-wide levy on the rental value of land. What a boon that would have been to the largest state economy in the US!

Let’s hope it can garner enough support next time around. Had the “Prosper California” initiative actually been adopted, the Golden State would have been a position to demonstrate, to the rest of the states and the world, that unemployment is unnecessary. By curbing sprawl-inducing land speculation and real estate booms and busts, California could have put all its citizens, and all its immigrants, to work without breaking anybody’s bank.

“Insanity is doing the same thing over and over and expecting different results.” This maxim has been misattributed to Albert Einstein, Benjamin Franklin and Mark Twain. Today I read that it actually first appeared in a 1981 pamphlet from Narcotics Anonymous.

Ah, well. It’s still a worthwhile saying. However, I don’t think it truly applies to the current state of public dialogue concerning tax policy and the “Fiscal Cliff.” I don’t think our leaders are insane — although they do indeed seem to be planning to do the same things they’ve always done. I suspect that achieving exactly the same results will actually suit them just fine.

Wise Words

"There's a sense in which all taxes are antagonistic to free enterprise -- and yet we need taxes. ...So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago."

Quotes

"The windfall Rent from higher resource prices would be captured by the government and become public income - a partial realization of Henry George's ideal of a single tax on Rent. Using Rent to finance a minimum income could substitute for a considerable number of bureaucratic welfare programs."